Strong consumer spending is essential for the recovery of the American economy. Consumer spending accounts for approximately 70 percent of gross domestic product in the United States, and because government and business spending largely remained remained weak in 2013, the economy depended even more on household spending to fuel growth last year. For economists, the all-important question is where the consumer spending trajectory is headed this year.
December’s retail sales growth — an important gauge of consumer spending — begs the analyst to delve deeply into the details in order to gain an understanding of the health of the American consumer; the results do not immediately suggest that the U.S. economy ended the year on a strong note. The Department of Commerce reported Tuesday that retail sales rose 0.2 percent in the last month of 2013, with Americans shopping more frequently online and eating out more often. That 0.2 percent gain may seem small, but it did beat the expectations of analysts who had predict sales would be flat with November.
More importantly, the core measure — which excludes volatile spending on autos, gas and building supplies — increased a solid 0.7 percent. Economists believe that figure is a better proxy for Americans’ confidence in the economy because it does not include those volatile categories. Americans spent $431.9 billion on retail purchases and food services in December, an increase of 4.1 percent from the same month of 2012.
Still, even though the core measure of retail spending was solid, there are categories in which growth was noticeably absent. Retail sales were lifted by strong spending on food, clothing and accessories, and gasoline — items that are either necessities or gifts on the lower end of the price spectrum. In particular, the fact that Americans spent 1.6 percent more on gas in December than in the prior month suggests that the price of the fuel rose, not that consumer confidence improved. Comparatively, the big-ticket items that are typically the staples of the holiday shopping season did not help boost the month’s number; sales at electronic and appliance stores declined 2.5 percent, while auto dealers experienced a 1.9 percent drop in sales. Automobile sales were a large source of strength in both October and November.
Together, the weakness in sales of big-ticket items, plus the 0.7 percent sequential decline and 3.3 percent annual decline in department store sales, which came even as clothing sales rose 1.8 percent, suggests that the holiday shopping season was lackluster. Total holiday sales from October through December rose just 1 percent from the previous year.
Retail sales for November were revised lower in the government’s December report. The Commerce Department noted that sales actually grew by 0.4 percent, a decrease from the 0.7 percent it had originally reported. When November’s results were released early last month, analysts saw the increase as evidence that higher household wealth created by the stock-market rally and increasing real estate values as proof that the United States economy was moving “in the right direction,” as Deutsche Bank chief U.S. economist Joseph LaVorgna told Bloomberg after the numbers were released. The question is whether the economy continued to move in the right direction in December.
Earlier in the year, it became clear that American consumers were keeping their purchases limited to immediate necessities as confidence in the economy — and the economy’s ability to created enough jobs to fill the gap left by the recession — weakened. June posted the weakest pace of growth since January, and the month’s numbers showed that overall consumer spending had slowed from the start of the year. But by July, the trend began to change. While there was evidence that the economy was still relatively weak after the tough spring, there was also proof that the economy was recovery from the hit it was dealt by January’s tax hike and March’s across-the-board federal spending cuts. The improving economy slowly began to strengthen business confidence in the United States, which in turn, prompted more companies to boost hiring. Better employment gains, combined with growing household wealth from the stock-market rally and improving real estate values, put a significant number of higher-income Americans in the position to increase their outlays.
From that cycle, the importance of job growth to gains in retail sales and consumer spending is obvious. The relationship between business spending, job creation, and consumer spending is a close one. U.S. businesses do not want to increase labor costs unless they are consumers will spend money on the goods and services they produce. Consumers must then spend money before businesses boost hiring. However, the American public needs employers to increase job creation in order to feel more financially secure.
In 2013, March’s across-the-board federal spending cuts kept government spending down, while businesses hesitated to boost spending, especially in terms of hiring new employees. Their caution was largely based in the fear that consumers would not increase their outlays on goods and services. While the overall picture of consumer spending is one of improvement, a closer view reveals more conflicting indicators about the health of the American consumer. Sales of big-ticket items like cars and houses were strong for much of the year, likely the result of pent-up demand, but, in general, spending has been sluggish in retail stores and restaurants. That pattern suggests that American consumers are more confident purchasing longer-term, “big ticket” items than they are increasing everyday expenditures.
Automobile sales did decline in December and consumer spending was primarily concentrated on personal necessities and items on the lower end of the price spectrum. However, economists, including Deutsche Bank’s LaVorgna, saw frigid temperatures as the problem. “If you look at what lifted spending — food, gasoline, clothing, online shopping — are all things you can expect to increase when the weather is bad,” he told CNN. “Harsh weather could have hurt some of the bigger discretionary items.”
In addition to the bad weather, employers added a fewer-than-expected 74,000 jobs to payrolls in December. But that weak hiring, like the bad weather, is expected to pass. “If we’re right in thinking that the underlying trend in jobs growth is still improving, households will continue to spend more freely in 2014,” Capital Economics senior U.S. economist Paul Dales told the Associated Press. Plus, he expects that the December gain in retail sale should be great enough to help the economy generate 3 percent annualized growth in the final three months of 2013.
For all of 2013, retail sales increased 4.2 percent from the previous year, a pace significantly lower than the 5.2 percent rate of growth recorded in 2012 and the 7.7 percent rate of growth posted in 2011, according to the Commerce Department.
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